Attorney William Bronchick: William Bronchick Best-Selling Author

 Short sale flips – the process of shorting a property then reselling it for a cash profit in a simultaneous closing has been taking heat lately from title companies and real estate brokers.  Realtor blogs are filled with drivel about how these transactions are illegal or unethical. What’s the real truth? The Basic Process The process of the short sale flip works as follows. Step 1: Investor signs a contract to buy a house from a seller who is behind in payments. Step 2: Investor contacts seller’s lender to negotiate short sale Step 3: Investor gets lender to approve short sale Step 4: Investor lines up backend buyer Step 5: Investor closes with seller, paying off lender, then resells to backend buyer in simultaneous closing for a profit. In essence, this is no different than a regular wholesale flip except instead of paying off seller’s lender in full, investor pays off seller’s lender at a discount. The Hoopla Some Realtors and title companies think the...

Capital gains, exchange rules and installment sales rules apply for properties held for “productive use.” I.R.C. §1234. If you are actively buying and selling real estate on a regular basis, you may be considered a “dealer” in real estate properties. A dealer is one who buys with the intent of reselling rather than for investment. There is no magic formula for determining who is an investor and who is a dealer, but the IRS will balance a number of factors, (See, e.g., Winthrop, Ada Belle v. Tomlinson, 417 F.2d 905) such as: The purpose for which the property was purchased How long the property was held The amount of sales by the taxpayer in that year Amount of income from sales compared to taxpayer’s other income How many deals the taxpayer did in that year The amount of gain realized from the sale “Flipper” Properties May Be Subject to Self Employment Tax If the IRS pegs you as a dealer, your properties are not “investments” but rather “inventory.” If you are flipp...